On the other hand, it is precisely companies that have some market power and are under less competitive pressure that are able to push through their price expectations. One European Central Bank (ECB) survey
comes to the conclusion that German industrial companies are more inclined to sharp price increases than their counterparts in France, Italy and Spain. The reason is probably that they are larger on average, have high market shares in their respective segments and therefore have less to fear from competition.
Who has the pricing power?
It’s just that the structural changes currently taking place in the economy are further increasing the pricing power of companies. De-globalization is progressing; the cross-border movement of goods, services, people and capital is hampered by all kinds of restrictions. The intensifying system contrast between China, Russia & Co. on the one hand and the West on the other creates new hurdles that impede exchange.
Western countries, for their part, selectively favor domestic providers over foreign ones – see the US President’s Made-in-America campaign Joe Biden. (Watch for midterm election results on Wednesday.)
Great Britain, previously the EU’s second largest economy, is now no longer a member of the single market; At the borders, controls, fees and customs are due in both directions. All these developments reduce the competitive pressure and strengthen the market and pricing power of the top dogs.
Even before de-globalization set in, some markets were experiencing concentration effects, leading to them being dominated by a few or even a single company. What may be a great thing for the ruling firm is bad for the economy as a whole.
Even before the Corona crisis, the International Monetary Fund (IMF) in a large-scale investigation
, how strongly the increasing concentration has western societies in its grip. In the years between 2000 and 2015, the market power of some companies increased noticeably. The mark-ups of a relatively small number of companies and industries have increased. Two-thirds of the higher price premiums are due to providers who already have a strong market position, not on innovative newcomers.
Incidentally, it is not unreasonable to assume that the liberal monetary policy of the central banks over the past few decades has favored concentration; cheap money enabled many company takeovers that would otherwise have been impossible to finance.
Intensity of competition decreases
The effects of the decreasing intensity of competition are amplified by the geopolitical shifts. And they are exacerbating the cost of living crisis. “Profits, not wages, were the main drivers of inflation,” says Isabel Schnabel, German ECB Executive Board member
, with a view to the start of the current phase of inflation last year.
If you look at the latest quarterly figures, it looks like little has changed, at least as far as the role of companies is concerned.
Additional inflation drivers: wages, climate, government spending
Now there is additional movement in the matter: The distribution battles are getting tougher. Employees and their unions are right to demand higher wages. After all, they suffered severe real income losses last year and this year and are now demanding compensation. (Watch Tuesday and Thursday for further collective bargaining in the metals and electrical industries.)
If things continue like this, there could be an escalation in employee demands and company profit claims, a price-wage spiral, as in the old monetarist models from the 1960s and 1970s.
Accordingly, the central banks in Washington, Frankfurt and elsewhere are trying to get the momentum under control – and the expectations of further price increases out of their heads. That will be difficult: inflation has already solidified alarmingly. It is taken for granted that energy will remain expensive and that inflation will continue to drive up inflation in the longer term in order to slow down climate change. (Pay attention to the World climate conference in Egypt, which starts on Monday.) Then there is de-globalisation. Price-driving factors that have not played a major role in past decades and are now complicating the situation.
Dare more capitalism
When it comes to curbing market power, they should use three tools:
– with a firmer competition policy that not only controls takeovers and cartels, but also tackles undue exploitation of dominant positions;
– with a free trade offensive, especially towards Great Britain and the United States, especially with a revival of negotiations for a transatlantic agreement, similar to the treaties between the EU and Canada such as Japan;
– with an opening of the capital markets for new, innovative companies that have little chance in Germany and the rest of Europe because the stock exchanges have developed into a club of established large companies from saturated sectors, as the OECD showed in a study
Has.
All of this would stimulate competition, limit the scope for price increases and make the economy more resistant to inflation overall.
Stricter monetary policy is not the only thing that helps against inflation. Sometimes it pays off to risk more capitalism.
The most important economic dates of the coming week
Monday
Sharm el Sheikh – It’s getting warm – The 1.5 degree target for global warming by the end of the 21st century cannot be met. How to proceed? Beginning of the United Nations Climate Change Conference (COP27).
Beijing – Globalization in the Far East – China’s customs presents figures on the development of Chinese foreign trade.
Brussels – The Nineteen – The Eurogroup (finance ministers of the euro states) discusses budget plans and measures to cushion high energy prices.
London – On strike – Renewed disputes in the kingdom. Again it hits the railways.
Reporting Season I – Business figures from Biontech, Qiagen, PostNL, Ryanair.
Tuesday
Munich – inflation compensation! – Fourth round of collective bargaining in the Bavarian metal and electrical industry.
Reporting season II – Business figures from Munich Re, Bayer, handle, Fraport, Schaeffler, Porsche Holding, Basler, Evonik, Endesa, Coty, Walt Disney.
Wednesday
Washington – Once upon a time there was a democracy – Congressional elections in the USA (“Midterms”). The polling stations close on Wednesday night. It is not just a question of whether the Democrats will lose their majority in both chambers of parliament, but also of the future of democracy. Because many of the Republican candidates are running on Trump’s grace and show little respect for the institutions of the republic.
Beijing – Relative stability – China’s statistical office presents figures on inflation developments in China.
Reporting season III – Eon financials, Adidas, Brenntag, Siemens Healthineers, Commerzbank, Evotec, Bilfinger, Sixt, Lanxess, ABN Amro, Veolia, Nissan.
Thursday Saarbrücken – Inflation adjustment!! – Fourth round of metal wage negotiations in the Mitte district.
Washington – Damn expensive – New figures on inflation developments in the USA.
Reporting Season IV – Financials from Deutsche Telekom, Allianz, RWE, Continental, Merck, Rheinmetall, United Internet, Dürr, Jenoptik, Bechtle, Knorr Bremse, Delivery Hero, K+S, Fielmann, Siemens Gamesa, Credit Agricole, Generali, ArcelorMittal, GFT, Hensoldt, Banca Monte dei Paschi di Siena, Zurich, AstraZeneca.
Friday Wiesbaden – In detail – The Federal Statistical Office announces the inflation rate for October 2022.
Reporting Season V – Business Numbers from Daimler trucks, Jungheinrich, Salzgitter, Richemont.